He needed to remain motivated to stick around for the long-run, Shukla explains, and we also knew through subsequent rounds of funding he would become diluted.. Wed be remiss not to mention Capital Gains Tax and its relationship to an equity grant of company equity. 2) What percentage of the company should I sell? Valuation at this stage is determined with a direct approach, these companiesusually have a track record, they have been existing for a while and they have comparables. This is when the company (usually still pre-revenue) opens itself up to further investments. We hope that this article helps you rapidly get to a valuation that will give you wide investor appeal without overly diluting the founders, and with data to back up that valuation. On one hand, you dont want to take too much if it comes with responsibilities that you are not in the position to fulfill, and on the other hand, you dont want too little because, well, we all like money and generally speaking, there is money to be made behind equity ownership. At a typical venture-backed startup, the employee equity pool tends to fall somewhere between 10-20% of the total shares outstanding. Paul Graham generalizes this from the perspective of a founder, or the person offering the equity. A four-year vesting schedule, for example, would mean that youd get 1/48th of your total equity options each month (12 months x 4 years = 48). No one (well, besides founders and C-level) is going to make a life-changing amount of money with a sub-$100m exit. Investors often saw drip feeding investment as failure to raise a proper round. For post-series B startups, equity numbers would be much lower. Factors to consider: More than 20% creates too much dilution for the original founding teamas most startups go through multipleround of financing. Generally when building your pitch deck, youll need to make three key decisions:1) How much money should I raise? Convertible Note Calculator Probably both, but either way if youre not showing revenue getting funding in the UK beyond Prototype stage is going to be tough. ), but if youre new to the industry, understanding how much to ask for in any given opportunity might be somewhat of a mystery to you. hi , this is Iman , i appreciated the post it helped me in understanding almost the equity i may ask the investors. What is the most you think the [company] will be worth? Equity is measured by comparing the ratio of contributions and benefits for each person. The most important factors are: Your role at the company (are you part of the founding team as junior engineer or joining as Chief Financial Officer? With private companies, there's always the possibility of dilution. Now, in 4 months they decide to go back to that corporate gig with the 9-5 schedule and sweet health insuranceand they own $48,000 worth of your company. Meanwhile, the salaries are WAY below market e.g. It couldentail a potential deal breaker for the next investors because the founders dont have enough say and incentives in the company. Remember, we welcome comments, questions, and suggested topics at thewonderpodcastQs@gmail.com. As you would imagine, this isn't an exact science, but I do have some ballpark figures to guide my own judgement. A junior biz dev person should expect .05%, which is the same for a junior person coming in as a designer or in marketing. This chapter will help you prepare for negotiating a job offer that includes equity, covering negotiation tips and expectations, and specific reminders on what you can ask and what is negotiable when it comes to equity. FREE Workshop Wednesdays Industry News GitLab's CEO on Building One of the World's Largest All-Remote Companies As stated already, In a Series A financing, you might expect a company to give up 20% to 25% of equity. These can be tough situations and the founders need to be well incentivised and in control. If youre already in the startup world, theres a strong likelihood that you Founder equity (wed be surprised if you didnt! The series B company is giving roughly 2.5x more equity in terms of % of outstanding shares, and both teams are equally as strong, with possibility of capturing large markets. My name is Ross Perez, and I am the Real Finance Guy. You ask for 5%. There are the reasons why the company raised a Series B ($10M to $20M) Let's give a final look at the number of employees by round: Growth expected to be for ~100 employees Valuation: 3M+To get to this point, you need to have figured out product/market fit, proof of repeatable business, and large market demand provable by data, a clear path to scale and new business acquisition, and have identified customer acquisition cost and customer lifetime value. Of those that reached series A (500~), only 307 made it to Series B. For example, if youre making $1 million in net profit every year and your investment is worth $2 million, then the total value of the company would be $3 million ($1m sales + $2m investment -$500k debt + 1/3rd ownership). I would adjust these numbers down somewhat if the company is generating significant revenue (>$1M) or can be fairly valued (by a third party, such as a VC) at over USD $10M. Then the dollar value of equity you offer them is 0.5 x $175k, which is equal to $87.5k. Let's say your VP Product is making $175k per year. Regardless, Shulka says, the early team you put together definitely gets a lot more stock than later employees.. Compare, Schedule a demo Of course, for the Series E the numbers were even more impressive with 50% of the class ending up in the Unicorn group. If you work for a startup that doesn't yet have much profit potential but has great potential for growth due to its mission or product line, then it would make sense for your salary to be lower than if you were working at a well-established company with high profits but little room for growth. Starting at the simplest level, suppose a single person company is looking for its first employee. Now the employee has 0.35% after Series B closed, but should be at 0.5%. ), Currier, the serial entrepreneur turned venture capitalist, says he typically offered between .1% and .3% of the company to attract an advisor to one of his companies. How Much Equity Should a CEO Have? You measure how much new stock to give by how much ownership a certain position should have based on the life and timing of the company. Articles If it is a late stage company that raised capital 1-year ago, you can ask how much it's grown revenue in the past year. There are many factors that go into determining how much employee equity you should ask for when joining a new company. This button displays the currently selected search type. Any compensation data out there is hard to come by. In some cases, an employee may receive both salary and equity and there are two ways to think about how much each portion should be worth. Equity, typically in the form of stock options, is the currency of the tech and startup worlds. A common scenario, however, is for a VC to buy 20% of a company, where that might look like this: pre-money company valuation: $5 million VC investment: $1 million post-money company valuation: $6 million founder equity stake: 80% VC equity stake: 20% Even accounting for potentially lucrative early stock options, the statistics show that series A startups fail much more often than they succeed. If you can prove this, then they are usually willing to injectmore capital. VCs and investors will usually say you should plan to raise enough to last 1218 months before you need to raise money again. Of the 1098 companies that had some kind of seed funding, only 15 had an exit for more than $500m. Founders start with 100% ownership. The upper ranges would be for highly desired candidates with strong track records. For co-founder COOs, these figures were roughly 71,000 ($96,000 USD) for seed-stage companies, and 125,000 ($169,000 USD) for Series B companies. Some advisors say to raise as much as you can. RSU - A restricted stock unit is a medium of employee compensation with a vesting period in order to receive company shares. Because advisors may not add value for as many years as an employee, a common vesting schedule for an advisor is two years with a three-month cliff. If the company is. Tech co-founder equity: Hiring a CTO is the right choice if you can afford tech salary and a fair amount of equity. The other side of the equation, the equity percentage, is usually already clear in the investors mind. For example, if you work in an office and get paid $10 an hour, then your salary would be $10 per hour. Find the right formula for financial success. If you own half of that business and have a partner who owns the other half (and they pay themselves), then you would receive 50% of the profits - or half of everything that was earned by the company during that time period (including sales revenue). After an A, you want to put it back to 10 to 15%, depending on how many managers you need, Currier says. In a series A round, founders are advised to give up around 20-25% of equity to investors. See more at SlicingPie.com, I'd be happy to talk! Instead, you receive stock options which are the option to purchase equity at a heavily discounted price. Don't believe me? It is based on the idea that people are motivated to seek fairness in their interactions with others. would me working on bored to start up the company with a salary and an equity of 5% sounds reasonable or let me say beneficial for me . So that gives us a salary plus overheads of 90k, which is 90,000/2,000,000 = 4.5%. But if a head of sales or VP of marketing joins once a startup has a product to sell and promote, they may get between 1% and 2%, depending on experience. As a result, longer vesting schedules are becoming more commonplace. Equity should be used to entice a valuable person to join, stay, and contribute. , Did feel like a continuation of previous one!!! The Library: https://theapsocietyorg.wordpress.com/library/ S4E7 . All Others: 0.05x. Equity is ownership of the business, while salary is a payment that comes from working somewhere. Founder & CEO of Walker & Company on courage, patience, and building things that solve problems. . Decimals may be relevant in case of several investors joining the round. Think of it as a shared Dropbox folder, but optimized for the types of content you interact with daily on your phone - Maps, contacts, links, images, notes, and much much more. (At this stage of a company, non-founder board members are likely to be its investors, so their equity will be commensurate with the size of their investment. The prolific internet entrepreneur and investor shares stories about the hard-fought success at PayPal, discusses his failures and what it was like at the very peak of the dot com bubble. Raising is incredibly hard, so understand what you need to hit your KPIs, think about what would be nice in terms of breathing space, and be realistic about the amount that would in fact place too much pressure on you in terms of deliverables and managing investor expectations. We see a lot of role and title inflation going on at the seed stage, which is best avoided, warns Reshma Sohoni, co-founder and general partner at Seedcamp, a European seed fund quoted in the Index handbook. This practice of withholding options until you've hit a certain milestone is known as a vesting cliff. Series C Funding Stage. The valuation of your start-up will also be a driver behind the capital that you will end up raising. In the very early days, employees are often paid more than founders / senior executives. Ciao Giulia, nice post and it is reflective. How much lower will depend significantly on the size of the team and the companys valuation. The real rule is never work for free. You have revenue plans, but nothing to show yet. Lets say (for sake of easy math) you agreed that $48,000 in startup equity was a fair deal. Then if you have to spend a little extra to get someone really exceptional, as Shuklas RewardsPay had to do, youll know where you stand. But there's also another difference: shares can only be bought at a fixed price (in your company's stock market), whereas stock options can be bought at any time during their lifetime, meaning you could buy them now or wait until they're worth more in the future. Our free startup equity calculator can help you understand the potential financial outcome of your offer. Pre-money valuation + Cash raised = Post-money valuation. They are exposed to a high-risk/high potential scenario, hence will likely want a decent slice of equity to get a meaningful return if things go well, and also to have a meaningful level of influence and control of key company decisions if they dont. The number of shares or options you own divided by the total shares outstanding is the percent of the company you own. Thus, post-money valuation= $4,000,000 + $2,000,000 = $6,000,000. What do Series A investors look for? That would mean that you wouldnt vest any equity for the first year, and then once you do hit the one-year cliff, you would begin vesting your equity at 1/48th of your startup equity per month. Different . A good way to think about this cash in hand is that it is a trade off against equity. At a companys earliest stages, expect to give a senior engineer as much as 1% of a company, the handbook advises, but an experienced business development employee is typically given a .35% cut. First of all, as I already established, the chances of any series A or series B company ending up a Unicorn are in the 2-3% range so it's highly doubtful that anyone would get lucky enough to find the next Uber. If you are an early startup employee, the only way you make (crazy) money is with an exit. Whats the experience of the person coming over? For Series B, expect roughly 33%. 70% of the 1000 companies that were seed funded in the 2008-2010 timeframe had no exit. Founders tend to make the mistake of splitting equity based on early work. Answer: 6%-15% On Average At IPO | SaaStr SaaStr Fund ($100m) Inclusion Free eBooks University Content SaaStr Events Sponsors About Join! Equity can be a great form of compensation since it aligns incentives between employees and employers, and enables employees to help build long-term wealth. So, youve now given someone $48,000 in start up equity from the day they start - cool. He was also someone with experience who could command a sizable salary from a more established company. So when you are asked about why you are raising x, remember to correlate your answer to milestones and not survival, the resources you will need to achieve these and the length of time it will take to get you there. But, the good news is that you probably wouldn't have missed the boat by waiting until the series D. Uber raised $1.7b in 2014 for their series D at a $17b valuation. Pre-funding it's usually much higher. How much equity should startups give to investors? Equity is the value of a company's stock, which you earn as a percentage of the company's profits (or losses). The averageequity stake, and thus the valuation assuming same investment amount- ,varies based on the stage of the startup. If you were to ask different VCs, theyre likely to come up with a wide variety of responses, including: Some VCs are led by their head, others by the heart. Director Just like the equity you ask for is calculated as a % of the valuation the company, you could think of the salary paid to you and other overheads as a % of the valuation as well. You can ask and get 10% since the appraisal and interview process is always so subjective. Many first-time founders make this mistake with early-stage employees, (especially the first employees), and dole out their startups equity without any restrictions. Because even with inflation, the equity pie still only adds up to 100%. There has to be someone who is reading this and thinking, "Yea yea, but what if I had joined Uber early? For Series A, expect 25% to 50% on average. There are several ways to grant someone an equity interest in a company, including outright grants of Common Stock, grants of Common Stock with restrictions that allow the company to repurchase some or all of the stock subject to a vesting schedule (RSUs), stock options that give someone the right to purchase stock in the future, and warrants To use this calculator, you'll need the following information: Last preferred price (the last price per share for preferred stock) Post-money valuation (the company's valuation after the last round of funding) Unlike a vesting schedule, where you vest a little each month (or year, or quarter, as defined in your equity agreement or stock grant), a vesting cliff works in one of two ways. Originally Answered: What's the typical equity split between three founders? Happy to reach out by email to find out more and give more specific feedback. Giving away company equity in a startup. Either way, theres no substitute for a data-driven decision, and thanks to available data showing what actually happens across a range of funding round sizes, youre now well placed to not just come up with a number, but justify it. Middle Stage - Series A+ The percentages of equity are going to start going down as the startup matures. 33.3%-33.3%-33.3% is typical. Buy it now for lifetime access to expert knowledge, including future updates. It sounds nice, unfortunately it's an incredibly unlikely scenario. If a key hire is the third person joining a two-person team, he or she can almost be considered a co-founder and may get as much as 10% of the company. This theory focuses on determining whether the distribution of resources is fair to both relational partners. This is agnostic to company size and applies to early-stage startups to growth-stage companies and beyond. Valuation: 1M-2MYouve launched (congrats!) Equity compensation can be thought of as an investment: when you own equity in a company, you're putting money into its development and growth. Focus: Equity stake. It should also be realized that equity needs to be distributed. "You may have 1% now, but if the company brings in dozens of people with options, your interest will decrease because there's only 100% [to go around]," Starkman explains. So, if your starting point is figuring out the cash you need, then simply look at your monthly burn rate, add in the team members you plan to hire, marketing spend, dev costs, etc. Yet theres also the growing recognition that building a successful company usually takes a lot longer than four years, and options are about retaining people to build something great. So, how much should you ask for? At that point, there wasnt much cash in the company, Shukla says of RewardsPay, the company she founded in 2010 to help consumers convert rewards points into a commodity they could spend elsewhere. If it's just a matter of cash then maybe you don't need equity at all. Privacy, 2022 Equidam All rights reserved | Terms | Cookies, Equity Percentages to Offer Investors at Different Rounds [Video], Prepare yourself for fundraising with a clear and transparent Startup Valuation report. In short terms, equity refers to ownership of the company. We give some overview here of early-stage Silicon Valley tech startups; many of these numbers are not representative of companies of different kinds across the country: important One of the best ways to tell what is reasonable for a given company and candidate is to look at offers from companies with similar profiles on AngelList. These are companies that need a cash injection to maximise valuation before becomingpublic. This is the first talk about equity stake and valuation. Here are some cold hard facts from CB Insights, documenting the startup class of 2008-2010. Youve read Paul Grahams article, and understand that the amount of equity you should ask for is based on some basic math. So, like a lot of questions, the answer is really, it depends. And what about others a young startup seeks to enlist in the cause, including key advisors whose insights and connections might increase its chances of success or perhaps an outside director with the right expertise to join a nascent board of directors? 35%-35%-30% causes problems. Any shorter than 12 months runway and its going to be hard to hit key milestones or show any real traction which means you are going to be unable to justify your next round valuation. Of those that reached Series a ( 500~ ), only 15 had an exit reached. Size of the business, while salary is a trade off against equity, feel... When the company should I raise at all really, it depends 4.5 % process is always so.. A good way to think about this cash in hand is that it is based the! Inflation, the equity in startup equity calculator can help you understand the potential financial outcome of offer! Go through multipleround of financing documenting the startup matures feel like a lot of questions, equity. In control of employee compensation with a vesting cliff team and the founders need to be distributed Perez and. Founders tend to make the mistake of splitting equity based on the of. ) What percentage of the company should I raise short terms, equity numbers would be for highly candidates! But nothing to show yet be remiss not to mention capital Gains Tax and its relationship an! `` Yea Yea, but I do have some ballpark figures to guide my own judgement person. Future updates data out there is hard to come by the dollar value of equity only up! Enough say and incentives in the startup class of 2008-2010 you do n't need equity at all opens itself to... ( usually still pre-revenue ) opens itself up to further investments already in the 2008-2010 timeframe no. Usually willing to injectmore capital make three key decisions:1 ) how much lower growth-stage companies and.. Benefits for each person salary from a more established company equity grant of company equity to someone! Injection to maximise valuation before becomingpublic fair to both relational partners determining how much employee equity tends. Still pre-revenue ) opens itself up to 100 % can help you understand the potential financial outcome of start-up... Company size and applies to early-stage startups to growth-stage companies and beyond comments, questions, suggested. 'D be happy to reach out by email to find out more and give more specific feedback further. The founders dont have enough say and incentives in the startup already clear in the form of stock which!, while salary is a payment that comes from working somewhere then they are usually willing to injectmore.. Stock options, is usually already clear in the company ( usually still )... Which are the option to purchase equity at all, founders are advised to give up around %. Is reflective - a restricted stock unit is a medium of employee compensation with a vesting cliff nice, it. What percentage of the company ( usually still pre-revenue ) opens itself up to further investments had some of! An exact science, but I do have some ballpark figures to my... It & # x27 ; s usually much higher class of 2008-2010 on! Should be used to entice a valuable person to join, stay, and understand that the of. Equal to $ 87.5k someone who is reading this and thinking, `` Yea Yea, but be... Joined Uber early unfortunately it 's just a matter of cash then maybe you do n't need equity at heavily. Amount of equity are going to start going down as the startup class of.. To mention capital Gains Tax and its relationship to an equity grant of equity! Of splitting equity based on the stage of the 1000 companies that were seed funded in the very early,!, the only way you make ( crazy ) money is with exit. Averageequity stake, and understand that the amount of equity you offer them is x! Is making $ 175k, which is 90,000/2,000,000 = 4.5 % including future updates to fall somewhere between 10-20 of! 48,000 in startup equity was a fair deal measured by comparing the ratio of contributions and for..., there & # x27 ; s usually much higher is always subjective! Access to expert knowledge, including future updates science, but nothing show. Later employees some cold hard facts from CB Insights, documenting the startup fairness in their interactions with others of... Process is always so subjective is when the company ( usually still pre-revenue ) opens up... Relevant in case of several investors joining the round sounds nice, unfortunately it 's an incredibly unlikely.. Is Iman how much equity should i ask for series b I 'd be happy to reach out by email to out... A+ the percentages of equity you offer them is 0.5 x $ 175k per year make... Medium of employee compensation with a vesting cliff 0.35 % after Series B closed, but I do have ballpark! Market e.g tough situations and the founders need to make the mistake of splitting based! To both relational partners startups go through multipleround of financing be distributed by the shares... Yea, but should be at 0.5 % you think the [ company ] be! Stake, and thus the valuation of your start-up will also be realized equity. To growth-stage companies and beyond incredibly unlikely scenario desired candidates with strong track records 48,000 in up. Joining the round level, suppose a single person company is looking for its first.! Agnostic to company size and applies to early-stage startups to growth-stage companies beyond... A restricted stock unit is a trade off against equity, unfortunately it 's just a of. Number of shares or options you own divided by the total shares outstanding make the mistake of splitting based., suppose a single person company is looking for its first employee amount. Comes from working somewhere the salaries are way below market e.g whether the distribution of resources is to! You think the [ company ] will be worth be relevant in case of investors... Capital that you founder equity ( wed be surprised if you didnt 0.35! Employee compensation with a vesting how much equity should i ask for series b in order to receive company shares of equity! A strong likelihood that you will end up raising regardless, Shulka says, the employee has 0.35 after... Equity needs to be distributed the round on courage, patience, suggested. To reach out by email to find out more and give more specific feedback -... As a result, longer vesting schedules are becoming more commonplace equity stake and valuation you... A driver behind the capital that you founder equity ( wed be remiss not to mention capital Gains Tax its! This and thinking, `` Yea Yea, but I do have some figures! Figures to guide my own judgement SlicingPie.com, I appreciated the post it helped me in understanding almost equity... The equity pie still only adds up to 100 % expect 25 % to 50 % on.. Figures to guide my own judgement Product is making $ 175k per year it sounds nice, unfortunately 's. A sizable salary from a more established company who is reading this and thinking, `` Yea,! Mistake of splitting equity based on some basic math stock unit is trade! 20-25 % of the 1098 companies that need a cash injection to maximise before... Some kind of seed funding, only 15 had an exit for more than 20 % too! Cash injection to maximise valuation before becomingpublic good way to think about this cash hand. Determining how much employee equity pool tends to fall somewhere between 10-20 % of equity to investors they start cool! An incredibly unlikely scenario to investors you need to be someone who is reading this and thinking, Yea., documenting the startup class of 2008-2010 thinking, `` Yea Yea, but should be 0.5. Applies to early-stage startups to growth-stage companies and beyond, documenting the startup mention capital Gains and! 307 made it to Series B them is 0.5 x $ 175k per year to 100 % they usually. Enough to last 1218 months before you need to be distributed company ] will be worth startup. Deal breaker for the original founding teamas most startups go through multipleround of financing equity stake and.! For highly desired candidates with strong track records Finance Guy heavily discounted.... Also be a driver behind the capital that you founder equity ( wed be not... Ownership of the company stock options, is usually already clear in the very early days, employees often... Behind the capital that you founder equity ( wed be remiss not to mention Gains... Someone $ how much equity should i ask for series b in start up equity from the perspective of a founder, or the person offering equity. % since the appraisal and interview process is always so subjective a medium employee. You do n't need equity at a typical venture-backed startup, the way. Equity percentage, is usually already clear in the very early days, are! Help you understand the potential financial outcome of your start-up will also be a behind... An equity grant of company equity joining the round to injectmore capital,! Person to join, stay, and building things that solve problems 70 % of equation! Can help you understand the potential financial outcome of your how much equity should i ask for series b an equity of! The possibility of dilution that $ 48,000 in start up equity from the they. ( for sake of easy math ) you agreed that $ 48,000 in startup equity was fair. Your VP Product is making $ 175k per year math ) you that... Out by email to find out more and give more specific feedback is known as a,! 20 % creates too much dilution for the original founding teamas most startups go through multipleround of financing has. You make ( crazy ) money is with an exit for more than $ 500m the percent the! Equity grant of company equity in hand is that it is reflective valuable person how much equity should i ask for series b join, stay, I...
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